PENSION16 Terry Parsley holds the gift that his wife Judith gave him the day he retired from United, a model of the Boeing 757 plane whose engines he worked on as a lead engineer.
Terry and Judith Parsley retired from United Airlines in 2002 after working there for more than 30 years each. United's financial troubles could lead to a big cutback in their pension expectations. Event on (12/10/04) in (Benicia)
Photos by Shelley Eades/The Chronicle

Photo: SHELLEY EADES

PENSION16 Terry Parsley holds the gift that his wife Judith gave...

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PENSION16 Terry and Judith Parsley retired from United Airlines in 2002 after working there for more than 30 years each. United's financial troubles could lead to a big cutback in their pension expectations. Photographed on their front porch in Benicia. Event on (12/10/04) in (Benicia, CA)
Photos by Shelley Eades/The Chronicle

When Terry and Judith Parsley retired from United Airlines in January 2002, each with more than 30 years on the job, the Benicia couple looked forward to getting combined pensions worth roughly $90,000 a year.

Later that year, however, United filed for Chapter 11 bankruptcy protection and told a federal judge that, in order to continue as a going concern, it would have to terminate its pension fund -- potentially forcing the federal agency that insures pensions to take over payments to retirees, probably at a reduced rate.

"What it's done is put everything up in the air," said Terry Parsley, 60.

For its part, the Pension Benefit Guaranty Corp., the federal agency created in 1974, worries about having to take responsibility for paying the roughly 119,000 people entitled to pensions from the airline.

"If the plan terminates, it will be the biggest loss we've ever absorbed, " spokesman Jeffrey Speicher said. He estimates it could cost the agency about $6.4 billion to assume United's payments.

A United spokeswoman estimated the cost to the government at closer to $1. 7 billion. United will ask federal Bankruptcy Court Judge Eugene Wedoff to take up the pension issue in February.

Behind the troubles at United loom two larger questions: Are pensions an endangered benefit? If so, what happens to the 44 million Americans whose ultimate guarantor is a federal agency that warns it may not be able to handle future shortfalls?

"What's the future of retirement? What's the future of pensions?" asked Rep. George Miller, D-Martinez, framing the issues facing policy-makers.

With the overhaul of Social Security emerging as the Bush administration's domestic priority, Congress might be reluctant to tackle yet another troubled retirement program in 2005.

But lawmakers will be pressured to address at least one aspect of the pension mess. Two years ago, Congress effectively reduced the amount of money companies have to put into pension funds. The change expires in December 2005, and companies will be lobbying to keep it.

Private-sector pensions came into vogue in the United States a little more than a century ago and quickly became the hallmark of blue-chip employers. By the 1960s and 1970s, about 40 percent of American workers were covered by defined-benefit pension plans.

Under such plans, employers promise retirees a certain level of payment based on length of service, pay and other criteria. Employers are obliged to put aside enough money to pay those benefits.

Some firms went out of business, however, or otherwise defaulted on their promises. One example was the collapse of the Studebaker-Packard Corp. pension in the 1960s.

Spurred by such failures, Congress passed the Employee Retirement and Income Security Act of 1974. ERISA regulates private pension funds. At the same time lawmakers created the Pension Benefit Guaranty Corp. to take over failed plans and make at least partial payments to retirees.

401(k) plans become popular

While Congress was trying to shore up defined-benefit pensions, employers were creating new retirement programs that did not commit them to specific payments. The most popular and widely known among them is the 401(k) plan, in which workers contribute to a retirement savings account from pretax income.

Employers make no promises about what employees will be able to draw from 401(k) plans when they retire. They often match employee contributions, putting fixed amounts into employee 401(k) accounts on a regular basis. Hence, the 401(k) is called a defined-contribution plan.

Since 401(k)s began to proliferate in the 1980s, they've become far more common than defined-benefit pensions. About 47 percent of American families have at least one wage earner who contributes to a 401(k)-type plan, according to the Congressional Research Service.

Only 20 percent of American workers are covered by defined-benefit pensions, according to the pension agency.

In the past few years, a series of failures has raised questions about the viability of the most common type of defined-benefit pension, the single- employer plan like the one at United. About 34 million Americans are covered by such company plans.

An additional 10 million Americans are covered by multiemployer pension plans. They include unionized workers in the trucking, retail food, construction, mining and garment industries. So far, multiemployer plans have remained sound.

Single-employer plans began experiencing serious funding deficits after the dot-com collapse. Plunging stock prices undermined pension funds that were heavily invested in stocks. At the same time, several steel and airline firms were hit by competitive forces that made it tough for them to stay in business, much less fund their pensions.

The fortunes of single-employer plans directly affect the stability of the pension agency, which takes over the investment assets of failed plans.

Supplementing the income it earns from these investments with fees collects from stable plans, it pays the plans' retirees, who would otherwise be left in the lurch, some portion of the benefits they were promised.

Surplus evaporates

As recently as 2001, the pension agency had a $7.7 billion surplus. But a spate of plan failures, the biggest being the $3.6 billion collapse of the Bethlehem Steel pension fund in 2003, has socked the agency with liabilities. In its 2004 annual report, it projected an eventual deficit of $23.3 billion - - a stunning reversal from the surplus of 2001.

"Has the death knell sounded for defined-benefit plans and the Pension Benefit Guaranty Corp.?" agency director Bradley Belt asked rhetorically at a speech in August, when he urged policy-makers to undertake a thorough overhaul of private pensions.

Karen Ferguson, who founded the Pension Rights Center in 1976, said that the agency is in no immediate danger, that most plans remain sound and that any changes should be designed to strengthen defined-benefit pensions.

"Part of this is people think you've got to create a crisis mentality so Congress will act," said Ferguson, who is fighting the notion that traditional pensions are passe.

Arthur James Norby, 76, is president of the National Retiree Legislative Network, an amalgam of 25 associations representing 2 million seniors with a common complaint -- their benefits were less than they had expected.

"While we were busy tending to our grandkids and playing golf, the corporations put their heads together and figured out how to screw their retirees," said Norby, who says the retirement security act "has been decimated" and now has "all kinds of holes."

That critique was echoed by Mark Warshawsky, the Treasury Department's assistant secretary for economic policy. "The current ERISA system ... is effectively riddled with loopholes," he told a group of investment actuaries in Boston on Nov. 8.

Goals for overhaul

In a telephone interview, Warshawsky said he's not sure the administration will propose an overhaul in 2005. If so, the proposals would try to ensure that plans are adequately funded and would look for new ways to shore up the pension agency.

Dallas Salisbury, with the Employee Benefits Research Institute in Washington, noted that pensions fall under the purview of three departments --

Treasury, Labor and Commerce -- and that all three Cabinet secretaries must sign off on any changes.

"It's going to be very tough for them to do something that is comprehensive," he said.

But employers, though not eager for an overhaul of the retirement security act, want Congress to make permanent or at least extend the two-year measure it passed in 2003.

That changed the formula companies use to estimate how much money they need to put away to pay future pension liabilities.

This calculation used to be tied to a low-interest federal Treasury bill. Congress instead linked it to a corporate bond rate that pays a higher interest, thus reducing the amount companies need to put in reserve now.

Mark Ugoretz, president of the ERISA Industry Committee, an industry lobbying group, said unless employers get their way on this issue, "the retreat from defined-benefit plans will continue."

Meanwhile, in Benicia, Terry Parsley said even if United jettisons its pension plan and his benefits are cut, he still feels lucky.

"Not many people can say they worked for a company from age 19 until they were 58," he said.

But he wonders why taxpayers, who ultimately stand behind the pension agency, should be on the hook for United's bills.

"When companies really go broke and bail out of their plans that's one thing, but this is a company that plans on surviving," he said.

"I don't think that's what people had in mind when they set up the pension guaranty plan."